dot. commentary By James Temple State's strengths not served by trying to match tax breaks

Updated 12:39 pm, Friday, December 7, 2012

Gov. Rick Perry and his government give out billions of dollars a year in tax breaks to help lure businesses like Apple and Electronic Arts to Texas.

Gov. Rick Perry and his government give out billions of dollars a year in tax breaks to help lure businesses like Apple and Electronic Arts to Texas.

Photo: Eric Swist, Associated Press

State shouldn't play Texas' tax game

1 / 1

Back to Gallery

Some of the biggest names in Silicon Valley decided to open or expand offices in Texas in the past three years - including Apple, Electronic Arts, Facebook and Oracle - lured at least in part by tax incentives.

It's certainly a troubling trend for the Bay Area and California, as Texas Gov. Rick Perry gleefully points out on occasion. But the real lesson is to build on the region's economic development strengths, not join the Lone Star State in a race to the bottom.

In a lengthy examination on Sunday, the New York Times reported that Texas offers more tax breaks than any other state, around $19 billion annually, to attract companies and jobs. Perry, who regularly flies to major cities around the nation to make his state's pitch, told San Diego officials this summer that about a third of the companies moving to Texas were from California, according to the article.

Curious about which companies and why, I called Perry's office. They provided an Excel sheet listing more than 130 companies spanning the state and stretching back to the early 2000s. In addition to the companies above, it included Visa, Nvidia, Altera, eBay, Toyota and Zynga. The governor's spokesman said the list wasn't all-inclusive.

Latest news videos

"We've created a fertile climate where innovators are free to create and nurture their ideas, and we keep government out of the way," Perry said at a recent conference. "The results have been overwhelming, almost difficult to believe, especially if you're from California."

That raw list and rhetoric are enough to send chills down the spine of any Bay Area economic development official, because if these decisions boil down to nothing more than dollars, our land costs alone leave little chance to compete.

Not just money

But fortunately it isn't just about money - a fact underscored in Perry's own chart. The final column reveals that the vast majority of the entries weren't "moves," as the Times described, but expansions. In other words, Bay Area companies are willing to shift their back offices, sales operations and call centers to Texas, but few have actually relocated their corporate headquarters. That's particularly true among technology firms.

The reason is clear. I've heard it countless times in interviews over more than a decade of covering business in the Bay Area. There's a unique terroir of self-reinforcing advantages that continually draw smart people and inspire creative businesses: a combination of world-class universities, leading venture capitalists and established industries, along with quality-of-life attributes like natural beauty, progressive mind-sets and a culture of risk-taking.

I'm not arguing that this is entirely sufficient to compete with a supposedly free-market state eager to subsidize private industry. I'm also not saying California can't lose these advantages over time, particularly as a city like Austin builds up a strong tech workforce of its own.

But I am suggesting that the appropriate path for the Bay Area is to build on its strengths, not sacrifice them in an effort to beat a state like Texas at its own low-tax game.

To be sure, companies move for a variety of reasons, many having little to do with tax breaks. Facebook wanted a sales force that could reach customers in a different geographical region. Apple is building new facilities to accommodate long-standing but growing operations in Austin. Altera is trying to tap the technical expertise in mobile chips spilling out of the University of Texas.

But tax incentives were clearly a factor in some instances.

In March, Austin's City Council approved an $8.6 million tax break for the Apple facility, under the threat that the company was also considering Phoenix, according to the Austin American-Statesman. A few years ago, Facebook secured a $1.4 million grant for its own Austin operation. Electronic Arts and Oracle also benefited from Texas incentive programs, according to local reports.

Job creation

The picture that Perry's office and most Republican administrations are eager to paint is that handing out tax breaks is the surest route to job creation, because it appears to prop up that tired old argument about trickle-down economics.

But none of this is about job creation. This is about job allocation. It's about politicians wanting jobs located in very specific ZIP codes, so they can herald themselves as job creators come election season.

Companies, of course, are only too happy to take advantage of these political calculations, playing communities off each other to ensure the best deal for themselves. Never mind that removing hundreds of millions of dollars from the tax base takes away hundreds of millions of dollars from schools, infrastructure, fire departments and more.

California joins in the game too, if on a different scale. It boasts 12 million more people than Texas, but gave out just under a fifth as much in incentive programs, at around $4.17 billion, according to the Times.

It's like the French Laundry trying to compete with the McDonald's dollar menu. You'd destroy what you are in the process, giving up the very things that make the region attractive to people and businesses.

In that light, it's all the more worrisome that California has been steadily cutting spending on higher education, police departments, parks, transportation and more.

Costs, investment

Instead, California should be doubling down on these long-term investments in its future - rebuilding aging public infrastructure, committing to keeping our universities world-class and turning out the leaders and risk-takers of tomorrow.

But yes, it would be naive to think that will be enough, when so much of business comes down to cost - and so much of California doesn't enjoy the Bay Area's particular economic development advantages.

We can't be the cheapest job center, but we should strive to ensure we're not the most expensive, Metcalf said. And the state and Bay Area should unquestionably take real steps to reduce our infamous regulatory complexity.

I don't mean we should toss out stricter regulations. Rules like AB32, the landmark bill requiring significant greenhouse gas reductions in California, are a model for other states and could help accelerate the shift to a green-energy economy.

But wherever possible, we need to make it simpler, cheaper and less time-consuming to abide by our rules.

Waste Connections, a waste collection company, was the one California firm on Perry's list that did relocate its headquarters to Texas this year, moving from Folsom to the Woodlands. The main reason was that the company wanted to be in a location more central to its nationwide network of customers, and closer to a major airport, President Steven Bouck said.

But he was quick to add that the regulatory climate in California didn't help, offering a telling stat: The state represents 10 percent of the company's revenue, but 80 percent of its legal costs. Bouck said the laws themselves conflict, as do instructions from officials, driving up compliance costs and headaches.

Bay Area companies looking at Texas

Latest from the SFGATE homepage:

Click below for the top news from around the Bay Area and beyond. Sign up for our newsletters to be the first to learn about breaking news and more. Go to 'Sign In' and 'Manage Profile' at the top of the page.